Asymmetric Conditional Volatility in International Stock Markets

Recent studies show that a negative shock in stock prices will generate more volatility than a positive shock of similar magnitude. The aim of this paper is to appraise the hypothesis under which the conditional mean and the conditional variance of stock returns are asymmetric functions of past information. We compare the results for the Portuguese Stock Market Index PSI 20 with six other Stock Market Indices, namely the S&P 500, FTSE100, DAX 30, CAC 40, ASE 20, and IBEX 35. In order to assess asymmetric volatility we use autoregressive conditional heteroskedasticity specifications known as TARCH and EGARCH. We also test for asymmetry after controlling for the effect of macroeconomic factors on stock market returns using TAR and M-TAR specifications within a VAR framework. Our results show that the conditional variance is an asymmetric function of past innovations raising proportionately more during market declines, a phenomenon known as the leverage effect. However, when we control for the effect of changes in macroeconomic variables, we find no significant evidence of asymmetric behaviour of the stock market returns. There are some signs that the Portuguese Stock Market tends to show somewhat less market efficiency than other markets since the effect of the shocks appear to take a longer time to dissipate.Comment: 11 pages, 3 figure

Stock Market Manipulation and Its Regulation

More than eighty years after federal law first addressed stock market manipulation, the federal courts remain fractured by disagreement and confusion concerning manipulation law\u27s most foundational issues. There remains, for example, a sharp split among the federal circuits concerning manipulation law\u27s central question: Whether trading activity alone can ever be considered illegal manipulation under federal law? Academics have been similarly confused-economists and legal scholars cannot agree on whether manipulation is even possible in principle, let alone on how to properly address it in practice

The New Stock Market: Sense and Nonsense

How stocks are traded in the United States has been totally transformed. Gone are the dealers on NASDAQ and the specialists at the NYSE. Instead, a company’s stock can now be traded on up to sixty competing venues where a computer matches incoming orders. High-frequency traders (HFTs) post the majority of quotes and are the preponderant source of liquidity in the new market. Many practices associated with the new stock market are highly controversial, as illustrated by the public furor following the publication of Michael Lewis’s book Flash Boys. Critics say that HFTs use their speed in discovering changes in the market and in altering their orders to take advantage of other traders. Dark pools – off-exchange trading venues that promise to keep the orders sent to them secret and to restrict the parties allowed to trade – are accused of operating in ways that injure many traders. Brokers are said to mishandle customer orders in an effort to maximize the payments they receive for sending trading venues their customers’ orders, rather than delivering best execution. In this Article, we set out a simple, but powerful, conceptual framework for analyzing the new stock market. The framework is built upon three basic concepts: adverse selection, the principal-agent problem, and a multivenue trading system. We illustrate the utility of this framework by analyzing the new market’s eight most controversial practices. The effects of each practice are evaluated in terms of the multiple social goals served by equity-trading markets. We ultimately conclude that there is no emergency requiring immediate, poorly considered action. Some reforms proposed by critics, however, are clearly desirable. Other proposed reforms involve a trade-off between two or more valuable social goals. In these cases, whether a reform is desirable may be unclear, but a better understanding of the trade-off involved enables a more informed choice and suggests areas in which further empirical research would be useful. Finally, still other proposed reforms are based on misunderstandings of the market or of the social impacts of a practice and should be avoided

High‐Frequency Trading and the New Stock Market: Sense And Nonsense

The stock market has been transformed during the last 25 years. Human suppliers of liquidity like the NASDAQ dealers and NYSE specialists have been replaced by algorithmic market making; stocks that once traded on a single venue now trade across twelve exchanges and a multitude of alternative trading systems. New venues like dark pools, and new participants like high‐frequency traders, have emerged to take on prominent roles. This new market has had more than its share of controversy and regulatory scrutiny, particularly in the wake of Michael Lewis’s bestseller Flash Boys. In this article, the authors analyze five of the most controversial new market practices, including various high‐frequency trading strategies and dark pool activities. They set out a simple conceptual framework based on adverse selection and agency problems, and apply that framework to assess the welfare effects of each of the five practices. While much that is criticized is indeed objectionable, other controversial practices are much more complex than popularly imagined and may in fact be socially desirable. They conclude by evaluating a range of potential reforms to equity market structure

Manipulating Citadel: Profiting at the Expense of Retail Stock Traders\u27 Market Makers

This Article considers whether securities market strategies designed to profit at the expense of so-called “internalizers” should properly be considered illegal manipulation. An internalizer acquires from a brokerage firm the right to be the market maker for the broker’s full order flow from its retail customers, promising in return to execute each order at a price slightly better than the best price available on any exchange (“price improvement”) as well as to pay the broker a fee for each executed order (“payment for order flow”). Almost all retail trading — about 29% of the country’s total share volume — is executed in this fashion, amounting in 2021 to about $41 trillion in transactions, a figure almost twice the nation’s GDP that year. The internalizer can run a viable business while promising both price improvement and payment for order flow because retail traders rarely possess information not already reflected in price. This makes the buy and sell orders internalizers receive less dangerous to fill than the more varied order flow going to exchanges. The internalizer’s business model, though, has a vulnerability: a trader can influence what is the best price available on the exchanges and then profit by sending an order to an internalizer that, as a result, executes at a price more favorable to her. Using a framework that derives its key results from microstructure and financial economics, this Article seeks answers to four questions: (1) Exactly what actions in the market can traders take that would allow them to profit in this fashion? (2) What are the consequences to the various players in the market from traders undertaking such actions? (3) Would it be socially desirable to use legal prohibitions to try to prevent traders from profiting in this fashion? (4) How are such practices treated under existing law, and what reforms, if any, are desirable? The usual rhetoric concerning the evils of manipulation stresses its unfairness and its distortion of prices. This Article, however, concludes that strategies aimed at profiting off internalizers raise no serious fairness issues. Equally surprisingly, it concludes that if these strategies were freely occurring, they would probably indirectly marginally improve price accuracy. It is unlikely, however, that this effect would be more socially valuable than the practices’ socially negative impact on liquidity. This negative social welfare assessment becomes that much bigger when one adds in the resources consumed by traders engaging in these strategies and by internalizers to protect against them, resources that otherwise would have been available to produce valuable goods and services for society. The status of these strategies under current case law is uncertain. If they are ultimately adjudicated to be legal, their use would expand greatly. The language of Sections 9(a)(2) and 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 leave room, however, for the development of a coherent doctrine that definitively extends the Act’s prohibitions against manipulation to cover these strategies. The analysis in this Article gives the courts good reasons to do so

Stock Market Manipulation and Its Regulation

More than eighty years after federal law first addressed stock market manipulation, federal courts remain fractured by disagreement and confusion about manipulation law\u27s most foundational questions. Only last year, plaintiffs petitioned the Supreme Court to resolve a sharp split among the federal circuits concerning manipulation law\u27s central question: whether trading activity alone can ever be considered illegal manipulation under federal law. Academics have been similarly confused economists and legal scholars cannot agree on whether manipulation is possible in principle; let alone on how, if it is, to address it properly in practice

High‐Frequency Trading and the New Stock Market: Sense And Nonsense

Peer Reviewedhttps://deepblue.lib.umich.edu/bitstream/2027.42/142455/1/jacf12260.pd

The impact of news on measures of undiversifiable risk: evidence from the UK stock market

Using UK equity index data, this paper considers the impact of news on time varying measures of beta, the usual measure of undiversifiable risk. The empirical model implies that beta depends on news about the market and news about the sector. The asymmetric response of beta to news about the market is consistent across all sectors considered. Recent research is divided as to whether abnormalities in equity returns arise from changes in expected returns in an efficient market or over-reactions to new information. The evidence suggests that such abnormalities may be due to changes in expected returns caused by time-variation and asymmetry in beta

Explaining co-movements between equity and CDS bid-ask spreads

In this paper I show that the co-movements between bid-ask spreads of equities and credit default swaps vary over time and increase over crisis periods. The co-movements are strongly related to systematic risk factors and to the theoretical debt-to-equity hedge ratio. I document that hedging and asymmetric information, besides higher funding costs and market volatility risk, are driving factors of the commonality and are significantly priced in CDS bid-ask spreads

Discrete-time volatility forecasting with persistent leverage effect and the link with continuous-time volatility modeling

We first propose a reduced-form model in discrete time for S&P 500 volatility showing that the forecasting performance can be significantly improved by introducing a persistent leverage effect with a long-range dependence similar to that of volatility itself. We also find a strongly significant positive impact of lagged jumps on volatility, which however is absorbed more quickly. We then estimate continuous-time stochastic volatility models that are able to reproduce the statistical features captured by the discrete-time model. We show that a single-factor model driven by a fractional Brownian motion is unable to reproduce the volatility dynamics observed in the data, while a multifactor Markovian model fully replicates the persistence of both volatility and leverage effect. The impact of jumps can be associated with a common jump component in price and volatility